Options Update: Akamai Technologies Call Volume Soars Following Cyber Monday
According to Hoover’s, Akamai enables companies and government agencies to deliver Web content and applications, such as ads, business transaction tools, streaming video, and Web sites. The firm accomplishes this mighty task through a network of some 30,000 servers in about 70 countries.
With a lack of any headline news for the company, it appears that speculation on Web traffic and demand for services alone is driving traders into AKAM options today. So far, more than 10,000 AKAM calls have changed hands, outnumbering the stock’s average daily call volume by more than 10 to 1 and placing the shares on our Intraday Volume Explosion List. However, it was the fact that nearly all of this activity was concentrated at AKAM’s December 12.50 strike that caught my eye today.
The Anatomy of a Akamai Technologies Call Position
Wading into the fray, I was a bit startled to see that nearly all of the more than 9,900 contracts that changed hands at AKAM’s December 12.50 call appeared to have been sold. Open interest at this front-month option totals a mere 1,768 contracts, lending credence to the idea that the stock was targeted by sell-to-open call positions. A call-sell position is similar to a put-sell, except that the trader needs the shares to remain below the sold call through expiration in order to keep the premium received. As you might have guessed, I will be running with a call-selling theme this afternoon.
Specifically, a block of 8,906 December 12.50 AKAM calls traded at the bid price of $0.55 at 10:39 a.m. Eastern time, netting the trader a total credit of $489,830 — ($0.55 * 100)*8,906 = $489,830. As noted above, call-sell trader keeps the premium received on the trade as long as the underlying shares remain below the sold strike through expiration, which, in this case, is December 19, 2008.
By entering this trade, the investor is indicating 1 of 2 things: that he expects AKAM to remain below $47.50 per share through expiration, or that he wishes to sell the stock at $12.50 per share. In today’s trading, the stock has rallied more than 3.5% and is threatening short-term resistance at the 12 level, thus calling into question a trade designed to capture premium on a sold call. Let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Technically speaking, AKAM has plunged more than 67% so far in 2008, vastly underperforming the S&P 500 Index’s (SPX) loss of about 44% for the same time frame. Recently, AKAM’s rally from its mid-November lows has met with resistance at the 12 level. This area previously provided support for the shares from October 10 through November 18 and could now limit the stock’s upside potential over the short-term. Furthermore, AKAM’s declining 20-day moving average is descending into the area, providing an additional layer of overhead technical resistance for the security. This technical configuration could favorably impact a sold December 12.50 AKAM call.
The Sentiment Drivers
The stock’s sentiment indicators are also aligned positively for today’s call-selling example. Specifically, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.41 indicates that calls more than double puts among near-term options. Furthermore, this ratio ranks below 72% of all those taken during the past year.
Additionally, data from the International Securities Exchange and the Chicago Board Options Exchange indicates that the ratio of puts bought to open versus calls bought to open during the past 10 trading sessions is higher than 77% of such readings taken in the prior 52 weeks. This rising optimism on an underperforming stock has bearish implications from a contrarian perspective.
Finally, Zacks.com reports that 10 of the 21 analysts following the security rate it a “buy” or better. With the shares locked in a long-term downtrend, there is an increased likelihood of downgrades from this bullish bunch, creating a additional downside risk for the shares.
Admittedly, I’m not a big fan of call selling, especially in the current market environment. If the position is covered (i.e. you own enough AKAM shares to cover the sold options), then collecting the premium on the right to sell your shares at the strike price is all well and good. But, from a purely options trading standpoint, there is a considerable amount of risk in selling naked calls with the recent market environment.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.